University of Phoenix founder dies, leaving complex legacy

The University of Phoenix lost its founder last week at a moment when some wonder if the world's biggest for-profit college system is losing its edge. John G. Sperling died in Marin County on Friday at 93, leaving a multi-billion-dollar company and a complex legacy behind.

Sperling founded the Apollo Education Group and its flagship University of Phoenix in 1976, the first major player in what has become the controversial market of for-profit higher education, aimed at older, nontraditional students whose work schedules would not allow a traditional college schedule.

UOPX and its imitators have many detractors. Critics argue that they suck students into ill-advised programs that they can ill-afford, saddling them with debt or dubious degrees.

The pressure to keep enrollment numbers up leads to sketchy recruitment of vulnerable students, says Robert F. Muth, a former Marine who works with the University of San Diego’s Veterans Legal Clinic.

“You have high pressure placed on recruiters to enroll a set number of students,” Muth said. “I think it’s inevitable when recruiters have to hit those targets that they will often say whatever has to be said to get a student enrolled.”

During the first decade of the new century, enrollment at Sperling’s Apollo Education Group climbed sharply, from 125,000 students in 2001 to 471,000 in 2010.

But Sperling’s brainchild also has its fans, including many students who found exactly what they needed there in a form not offered by not-for-profit colleges.

A critical niche

It’s no coincidence that Sperling hatched the idea for the University of Phoenix when he was a professor at San Jose State University, a commuter school disproportionately serving nontraditional students. SJSU should have been keenly attuned to the need for flexible classes for working students, but he found little interest in innovating, Sterling writes in his 2000 autobiography, "Rebel with a Cause."

Sperling started his for-profit answer in California, but soon moved to Arizona, attracted by its less aggressive regulations, he writes. Tapping unmet demand, he found legions of students who wanted a degree that gave them credit for work experience and offered night classes on a rolling schedule that could be completed in weeks, not months.

One of those was Mark McKay, now a senior technology manager at General Electric in Huntsville, Alabama. McKay earned both a bachelor’s and an MBA through the University of Phoenix, allowing him to climb the ladder at one company and move laterally into middle management with one of the world’s largest corporations, with substantial salary gains.

Out of high school, McKay turned down a college scholarship to work on a cruise ship. When he finally got a real job at the age of 24, it was grinding precision lenses at Coherent, an optics manufacturer in Auburn, California.

McKay rose to line supervisor and then into a project planner position, but then he hit the credentials wall. “They didn’t send signals,” McKay said. “They said it flat out: I had to have that piece of paper to break through.”

Only the Apollo’s University of Phoenix offered McKay exactly what he needed. Over four years he worked days and studied nights. In four years, he graduated, got his promotion and his career prospered.

“At the time, I looked at Sacramento State University, but they didn’t offer anything that allowed me to move quickly on flexible schedule,” McKay said.

And despite admittedly high tuition, the University of Phoenix approach worked for him. His company heavily subsidized the tuition, and the total remaining debt was well worth it to him. “The income increase substantially more than paid for it,” he says. “It’s almost exponential.”

Intense scrutiny

McKay got his degree during Apollo’s golden age. The numbers tell the story. Pell grants given to Apollo’s students jumped from $257 million in 2007 to over $1 billion in 2010. Federally guaranteed loans issued to students at Apollo-owned schools also spiked, as did the company’s net revenue, which jumped 25 percent in just one year — from $3.9 billion in 2009 to $4.9 billion in 2010.

Such numbers for a publicly traded company seemed certain to make Wall Street happy. But how did they spike so quickly? And what were taxpayers and students getting for this infusion of cash and debt? The higher these numbers climbed, the sharper scrutiny became.

In 2010 a Senate committee led by Sen. Tom Harkin, D-Iowa, launched a two-year investigation into the for-profit market, issuing a detailed report in 2012. That report focused in part on high-pressure sales techniques used to keep revenue rolling.

The Harkin report cites a 2007 Phoenix sales manual that suggested that “after gaining voice-to-voice contact with your students, uncovering and developing needs, matching our benefits to their needs, and helping them to work through their concerns, you now have to challenge them to act NOW.”

Ironically, the manual taught recruiters to carefully obscure the very rolling schedule and flexibility that made the University of Phoenix unique and valuable, leading students to sign up quickly rather than deliberate their decision. But with the flexible schedule, classes started every few weeks and urgency to begin now was simply a fiction.

The committee also found high rates of withdrawals before completing a program and high rates of student loan defaults. Students who attended for-profits defaulted at three times the rate of those who attended other schools. And the default had climbed sharply during the same period that aggressive recruitment had led to spiking revenue: Apollo’s default rate jumped from 12 percent in 2005 to 21 percent in 2008.

These schools fill a vital niche, the Harkin report concluded, offering innovations that “have made attending college a viable option for many working adults, and have proven successful for hundreds of thousands of people who might not otherwise have obtained degrees.”

But the critical failing, the committee found, was an overemphasis on recruitment and inadequate interest in retention and job placement. The committee cited Apollo’s poor retention rates and high default rates.

On the whole, the for-profit schools the Harkin committee studied showed little interest in student development and retention, noting that the schools studied employed 35,202 recruiters compared with 3,512 career services staff and 12,452 support services staff.

And Apollo and its for-profit cohorts suppressed default rates, the committee argued, by managing students who were about to default, helping them into repayment plans that pushed them conveniently outside the 3-year window for defaults tracked by the Department of Education.

Targeting veterans

For the past several years, political and regulatory pressure for-profit schools has been unrelenting.

Apollo’s bottom line has suffered accordingly. Company financial statements show that in each of the next three years after the 2010 apex revenue steadily slipped, down to $3.7 billion in 2013. In its 2012 financial statements, Apollo reported a “goodwill impairment,” meaning that the value of the company had suffered from damage to its brand in public perception. Today, the University of Phoenix has roughly 242,000 students, according to the company's most recent financial statement, a dramatic decline for a school that once had an enrollment of over 500,000.

The brand was not helped by a widely circulated story by Aaron Glantz at the Center for Investigative Reporting, which noted that in the past five years the San Diego campus of the University of Phoenix alone took in $95 million in GI Bill funds, more than the whole University of California system combined.

The graduation rate at the San Diego campus of the University of Phoenix is below 15 percent, Glantz reported, and defaults on student loans exceed 25 percent, all with a per credit cost more than 10 times that of a community college.

One reason for those low success rates is that veterans are being misinformed by aggressive recruiters, says Robert Muth at the University of San Diego.

For-profit colleges target veterans, Muth said, because their GI funds are exempted from federal rules requiring that at least 10 percent of a school’s revenue come from non-federal funds.

“A lot of these schools are very close to that 90/10 cutoff,” Muth said, “so if a school can sign up one veteran, they can add an additional nine students who use Pell grants or student loans.”

Muth said that they have seen repeated instances of veterans being told job placement numbers orally, numbers that were then contradicted in the written materials the veteran was asked to sign. Some schools will cite job placement data in culinary arts, Muth said, “but they include people who end up flipping burgers.”

The human face of Glantz’s story on San Diego veterans is a 20-year Navy veteran named David Pace, the counterpoint to Mark McKay’s success story. Pace used all his GI Bill funds on a business degree from the University of Phoenix that got him literally nowhere. Today, he works in a gritty manual labor job that he could have gotten right out of high school.

What was needed

But for all of Apollo’s shortcomings — and all of the industry’s flaws — the demand remains doggedly and curiously unmet by the sort of state schools that could fill the niche. And more than a few satisfied customers, like Mark McKay, still appreciate the role it played for them.

Midway through his studies, McKay’s company transferred him to Albuquerque, New Mexico, where he was able to finish his degree without missing a beat. Before long, he took a job with General Electric — an opportunity he never would have had without the degree. And when GE shut down operations in Albuquerque in 2012, he was part of the management team that selected which staff to retain and transfer to Alabama.

“I already had my foot in the door and had already proven myself,” McKay said, acknowledging that those who take on the debt — or like David Pace, use their GI Bill — and then enter a tough job market could have very different experiences.

Today, McKay sees younger versions of himself, some working under his supervision at General Electric. “I encourage them to continue their education,” he said. “Some go to University of Alabama, Huntsville, but I encourage them to go to the University of Phoenix if that fits their schedule better.”